Is it the END of Paper Currency?

It is almost three centuries[i] since the paper currency became a legal tender and replaced bullion coins as a means of exchange. Over these centuries much has changed about how we make, sell, buy, loan goods or services etc. but cash has been the common thread throughout this journey. Today with the rise of digital penetration, eCommerce and ubiquity of smartphones questions arise on the viability of having physical currency around. To add to this milieu we have cryptocurrencies catching the fancy of people – more on cryptocurrencies in a separate article later.

Some interesting trends are emerging in developing nations - apps such as bKash of Bangladesh, mPesa of Kenya, PayTm of India, and WeChat of China. Every day more and more people in these countries are getting comfortable using these apps as a means of daily transactions. (As per Euromonitor 2016 Report, card payments surpassed cash payments to reach a global USD 23.1 Trillion figure). Add to this PayPal, Apple Pay, Alibaba’s ANT and their forays in developed world and one gets a picture that cash is, in all likelihood, following the path of other ‘information goods’ – Photos to digital images on Instagram, Flickr, FB et al, Music CDs to Spotify, iTunes and DVDs to Netflix, Hulu, Amazon Prime et al.

One can infer from these trends and data at hand that we are moving towards cashless economies. It begets the question; what is key to becoming cashless societies?

In this article, we will look at some of things that are essential for this move towards cashless societies. We look at a few examples from Nordic region and China to see if some factors helped and can we learn something.

To go cashless, in addition to ubiquity of smartphones and uninterrupted access to Internet, large sections of populations need to have access to bank accounts and should be at ease with online banking, to say the least.

Nordic countries meet the above criteria and it is no surprise that this region has made significant strides towards cashless societies. Although I believe that geography too has played a role, on which I will elaborate later in the article. 

Sweden may become 100 per cent cashless soon. If you have visited and drove around you would’ve noticed that you need not bring along any cash on you. Whether you’re having mulled wine or buying souvenirs or gifts at a Christmas market; downing a beer or enjoying a coffee at a roadside stall – all payments can be done digitally, plastic money is accepted everywhere. Buses in Sweden have not accepted cash for years now. Even the religious are making donations digitally, one Stockholm church received just 15% of donations in cash, and rest were digital or plastic.

Some other interesting points pertaining to Sweden are as below:

• Just 2% cash transactions by value were made in 2016 and it is estimated to drop to 0.5% by 2020
• Across shops less than 20% of transactions by volume were in cash versus a global average of 75%
• Of its 1600 bank branches, 900 no longer keep cash or take cash deposits, many rural branches do not have ATMs. (In 2013, a robber left empty handed, as the branch was no longer keeping cash!)

Denmark is another country that is moving towards a cashless economy. As of now nearly 80% of all transactions are digital. Government has promised that soon retailers, restaurants and petrol stations will not be legally bound to accept cash (card or digital instead of cash will become the king). The logic being, it will free up these enterprises of cost of security and the burden of managing notes and change at the till. Furthermore, the government is providing every citizen with a free bankcard so that even the destitute will now be able to switch to mobile payments (It has happened to me that many times I am not carrying cash to help a fellow being, so this will surely be helpful and considerate.)

A good Danish example will be MobilePay – a payments app created by Danske Bank in 2013. It has a partnership with the Association of Homeless People in Denmark to let them accept donations via smartphones – yes you read it right, digital donations to homeless! Smartphone penetration is in high nineties in this region; Sweden (96%), Denmark (96%), Norway (97%) and Finland (94%). As of today, this app is downloaded on over 90% of smartphones and used by over 3.6 million Danes to make over 214 million transactions each year.

Going a step further, the Danish Central Bank is contemplating launching e-Krone to reduce the transaction costs on small and micro transactions. Presently many e-payments are an expensive proposition for such transactions as the processing fee makes them unviable. Many questions require discussion and debate before going ahead but the idea is on the table and contemplated by the highest monetary authority of the country.

So what are the key factors for this significant success of digital payments in this region?

• High penetration of smartphones
• Vast coverage and access to Internet
• Access to formal banking

It is my belief that apart from all of the above, geography and climate play a vital role. Inclement weather and difficult terrain increases the cost of transactions and management of money and hence it becomes easy to have it digital.

China – the biggest market from developing countries that's on everyone’s radar is making significant progress in digital payments. It is galloping away because it leapfrogged the plastic card phase during its transition from cash to digital.

At the end of last decade, nearly 2/3rd of ecommerce payments in China were Cash-on-Delivery (COD). It was the same story until 2013 and then suddenly the landscape changed. By 2016, over 70% of all ecommerce payments were being made through mobile. Alibaba and WeChat (Tencent owns the latter) used innovative methods such as QR codes, in-chat payments to redefine customer experience. Resultant Chinese did USD 5.5 trillion worth of transactions in e-payments in 2016 – 50x the size of US market. Again, penetration of smartphones (731mio Chinese own one) usage of Internet (95% of smartphone users access Internet via mobile) opened up plethora of possibilities. The controls on technology and competition in China also helped incumbent players.

In China (will hold true for India and many other Asian countries), Near Field Communication (NFC) and card terminals are unviable for a large section of enterprises such as roadside eateries, neighbourhood markets, buskers etc. because these entities will not find it worthwhile to invest in hardware when average bill size will be around half a US dollar. In such a scenario, the QR codes acted as a catalyst for masses to adopt and shed their fear of digital transactions. Anyone with a bank account and smartphone was able to exchange goods and services for a price with anyone without exchanging and managing notes and coins.

One needs to give credit to WeChat that introduced a peer-to-peer transfer of funds back in 2014 that helped in behavioural change in people; consider the below numbers that WeChat clocked:

• It did transactions worth USD 556 Billion on its platform in 2016
• During 2016 Chinese New Year week USD 46 Billion worth of funds were sent as gifts in virtual red envelopes (a local tradition) versus just USD 1 Billion worth of transactions in 2015

Walking at a subway in Shenzhen don’t be surprised if you see a busker with two jars – one for cash and another with QR code taped for WeChat transfers!

Another behemoth from China, Alibaba owns AliPay – the biggest payments company in the world by transactions and revenue. Last year on Singles Day Sale (11 of Nov because it looks 11-11) it raked in USD 17.8 Billion in revenue of which 82% came via mobile payments. ANT Financial (a separate arm that owns and manages all payments for Alibaba) has entered into an agreement with three Chinese cities[ii] to develop infrastructure that will allow their residents to move around cashless – doing all shopping and travel via smartphone!

Because of sheer size of China as a market, the numbers are huge and dwarf nearly every other country in absolute terms. I will like to point out that in spite of significant progress and widespread usage when it comes to percentage it is still a vast market to capture and develop. Mobile payments account for mere 12% of all payments; online payments constitute 16% of the total; cards account for 41% and a whopping 30% of transactions are still in cash.

There are many other benefits of going cashless apart from lowering of transactions costs and convenience. The social benefits of going cashless are:

• Reduction in organised crime since it usually prefer cash as it leaves no trace of origin
• Lowering incidents of street violence – burglaries, robbery, larceny that usually have looting of cash as the most common motive
• Addressing the ‘zero lower bound’ effect[iii]

Going cashless is an important topic and requires many different views and considerations such as right of privacy, do companies own purchase histories, State’s ability to monitor an individual’s transactions etc. Bitcoin – a cryptocurrency – emerged to meet the need of anonymity in digital age as a substitute for cash but it has many downsides of cash.

Please share your comments, inputs and suggestions on the article as a direct message or as a comment. I’ll like to receive links of articles or material on this topic/s to further enhance my understanding. Do share details about start-ups across industries that you know of that are working with any of the topics mentioned in this article

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Notes

[i] The first money in the form of silver coins can be traced back to 640BC to King Alyattes of Lydia, in western Anatolia

[ii] Fuzhou, Hangzhou, Wuhan

[iii] Central banks typically fight recessions by lowering interest rates, which stimulates the economy by making saving less lucrative and encouraging consumers and businesses to spend. However, if interest rates dip below zero, meaning banks effectively charge savers; customers can simply withdraw their cash and sidestep the policy entirely. This effect is known as the "zero lower bound," and is considered a serious limit to the effectiveness of monetary policy.

Acknowledgments

Thanks to my partner and friend, Samika for taking time out to explain and forwarding many articles on the subject. To all writers of those articles and various authors who have influenced my thoughts on this subject.